Everything You Need to Know to Create a Budget for Your Business

A business can bring in customers and make tons of sales every day, but none of that matters if the business’s financial health is at risk. Creating and maintaining a business budget provides clarity on your spending, helps you make informed decisions, and acts as a road map for sustainable growth.

This guide will walk you through a step-by-step process to build your small business budget, complete with tools and expert tips for best practices.

Why budgeting is essential for small businesses

Creating a strong budget is one of the most fundamental steps a small business can take, helping business owners maintain clarity and control over their financial resources.

Here are just a few benefits of having a solid budget in place:

• Provides financial direction: A well-thought-out budget acts as a financial road map for your business, guiding decisions related to income, expenses, and managing debt to achieve your goals. It lays out a clear financial plan, which is needed for things to operate smoothly and to allocate resources efficiently.
• Enables smarter decision-making: Having transparent insights into profit and loss allows business owners to make informed and strategic financial decisions. These insights help identify where to reduce costs and where to invest for potential growth.
• Builds financial resilience: Budgeting allows you to set aside funds for unexpected costs or economic downturns, creating a financial safety net. This preparedness helps reduce stress and ensures your business can remain stable, even when faced with challenges outside your control.
• Supports ongoing financial management: A budget isn't a static document; it will grow and change with your business and the market. Think of it as a way to keep tabs on your money, letting you see what's working and what needs adjusting as things shift.

Types of business budgets

There are two primary budget types, each with a distinct purpose: the master budget and the operating budget.

A master budget is a comprehensive financial plan that pulls together information from various financial statements, cash forecasts, and overall financial plans into a single document. It acts as a holistic tool for management teams to plan activities and monitor a business's progress toward its financial goals. Businesses often create their master budgets using spreadsheets or specialized software.

In contrast, an operating budget focuses specifically on projected revenue and expenses over a given period, much like a future profit and loss statement. This budget includes all your fixed and variable costs, as well as nonoperating expenses, but it typically excludes larger capital expenditures. The operating budget ensures your business is spending according to plan and should be updated regularly, usually monthly or quarterly, to stay on track.

In short, while the operating budget details the day-to-day financial picture, the master budget provides the overarching financial framework for the entire business.

A step-by-step guide to creating a small business budget

Ready to take control of your business's finances? Here's a straightforward guide to help you build a budget that works for your small business.

Step 1: Start with your revenue.

Your revenue is the amount you expect to make through the sale of goods and services. This is the total income you expect to make over a certain period, usually one month. Existing businesses can estimate revenue by looking at historical sales figures. Use the last three months or the same month from a year ago to predict what you believe your revenue will be.

For instance, if you're running a restaurant, you might include sales from in-person dining, deliveries, and curbside pickup. If you also sell prepared foods, for example, include the sales from that revenue stream as well. For new businesses without a sales history, use market research and industry benchmarks to accurately forecast potential revenue as best you can.

Step 2: Subtract your fixed costs.

Fixed costs are expenses that remain constant each month, regardless of your business activity or sales volume. Common examples often include:

• Rent or mortgage payments.
• Salaries for your core team.
• Insurance premiums.
• Regular loan repayments.

An easy formula to help you calculate fixed costs is:

Total cost of production - (Variable cost per unit x Number of units produced)

Depending on your industry, you may have additional fixed costs to account for on a regular, if not monthly, basis.

“Don't forget less obvious categories like taxes, insurance, and professional fees,” advised Paul Miller, a Certified Public Accountant (CPA) at Miller & Company, LLP. “These can sneak up on first-time business owners.”

Step 3: Estimate your variable expenses.

Variable expenses are costs that change from month to month based on your business's activity, such as sales or production volume. Unlike fixed costs, these costs are not constant, meaning they increase with more activity and decrease with less. Managing these is essential because they directly affect your profit.

These can include:

• Raw materials/inventory.
• Shipping costs.
• Sales commissions.
• Packaging supplies.

As you estimate your variable expenses, be strategic about every expense. Variable costs are where smart decision-making comes into play. If you forecast that sales will be lower during the coming month, you need to find ways to lower your business’s variable costs.

According to Karla Dennis, an enrolled tax agent and Founder of KDA Inc., small business owners often spend money without an expectation or purpose for that expense. She advised asking yourself, "What will this expense get me in return?" before making any purchases.

Step 4: Put money toward a contingency fund.

A contingency fund is like an emergency fund for unexpected costs that arise for your business. If a piece of equipment breaks down or if you need to quickly replace damaged inventory, a contingency fund prevents the need to take out a small business loan to cover these costs.

It can also be considered a savings fund for one-off costs, such as a new computer, for instance. This safety net is truly key. Setting aside money over time for a contingency fund makes it easier to save and helps you maintain financial stability when something happens unexpectedly. Dennis advises setting aside 10% of your business revenue for unexpected changes or new opportunities, while Miller recommends building in a “buffer” line item for unplanned expenses.

Step 5: Put together a P&L statement.

A profit and loss (P&L) statement, also known as an income statement or earnings statement, is exactly what it sounds like: a document that identifies a business’s profit (revenue) and losses (expenses). These statements help you evaluate your company’s financial health, typically quarter by quarter.

To create a P&L statement:

• Select a specific reporting period, like a quarter or a year.
• Gather all your financial data, including revenue from sales and all your business expenses.
• Add up your total revenue, then subtract your cost of goods sold (COGS) to calculate your gross profit.
• List and subtract all your operating expenses.
• Account for interest, taxes, depreciation, and amortization to arrive at your net income.

This process shows your business's true profitability over that period.

Step 6: Review and adjust your budget periodically.

Your budget is a living tool that needs regular attention. Set a schedule for monthly or quarterly reviews to help you spot emerging trends in your spending or revenue sooner than later. Catching these shifts early allows for proactive adjustments, preventing minor issues from becoming major problems down the road.

When reviewing, compare your actual financial results against your budgeted figures. Look for significant differences or variances. Understand why these occurred — was it higher sales, unexpected costs, or market shifts? This analysis helps pinpoint successes or concerns.

Next, identify opportunities for growth, or (if needed) areas to cut costs. Then, develop actionable recommendations based on your findings. Finally, monitor progress and update your budget as needed. This ongoing process ensures your budget remains a relevant guide for your business.

Common business budgeting models

There’s no one-size-fits-all approach to budgeting. Depending on your business’s size, goals, and growth stage, one model may work better than another. Below are some common budgeting methods, each with unique advantages and challenges.

Incremental budgeting

This model builds on the previous year’s budget, adjusting amounts slightly based on expected changes. It’s fast and straightforward, making it ideal for stable businesses with predictable expenses.

• Pros: It's easy to implement and promotes continuity.
• Cons: It can cause businesses to overlook opportunities for innovation and even perpetuate financial inefficiencies.

Activity-based budgeting

Activity-based budgeting focuses on the costs associated with specific business activities. Instead of starting with expenses, it identifies the resources needed for each operation or task.

• Pros: It offers detailed insights into spending and aligns easily with performance goals.
• Cons: It’s time-consuming and is best suited for businesses with complex operations or fluctuating demand.

Value proposition budgeting

This method asks a simple question for every budget item: “Is this expense driving value for the customer or business?” If it’s not essential, it’s removed.

• Pros: It keeps businesses lean and customer-focused.
• Cons: It’s a subjective process and may lead to omitting less-visible but still essential functions, such as training or long-term research and development.

Zero-based budgeting

Zero-based budgeting requires starting from scratch; every expense must be justified regardless of past budgets.

“Every dollar counts in a small business,” said Jason Manar, a former FBI Agent and Chief Information Security Officer at Kaseya. “During my time in the FBI, I found most successful small businesses used a zero-based budget. They built the budget from scratch, justifying every dollar spent that had to be directly correlated to necessities. Those businesses that were transparent and involved in all departments had a more comprehensive understanding of the needs and priorities of the company.”

• Pros: It eliminates financial waste and encourages strategic spending.
• Cons: It’s labor-intensive and can slow down the decision-making process.

Small business budgeting tips

The following tips can help small business owners build smart, strategic budgets for both the present and the future.

Know your numbers and plan with purpose

Yvonne Cobb, a CPA and Founder and CEO of TakeAway Tax, recommends that small business owners take a goal-oriented approach to financial planning.

“The key to effective budgeting is setting a specific financial goal — ‘finding your number’ — and working backward,” Cobb explained. “This … offers a clear benchmark and ensures that all decisions contribute directly to the business's goal.”

To maximize the benefits of this approach, establish both short-term and long-term numerical goals. Start with immediate targets, such as covering monthly expenses or reaching a sales milestone, and then map out broader objectives, like annual revenue growth or debt reduction. These goals give your budget structure and help measure progress along the way.

Be strategic about every expense

According to Dennis, small business owners often spend money without an expectation or purpose for that expense. She advised asking yourself, “What will this expense get me in return?” before making any purchases.

“Ensure every dime being spent is going to get you to your goals,” Dennis said. “This will help eliminate expenses that are not needed. Then, make sure you stay within the budget you set.”

Start with a month-to-month budget before planning longer-term

Ryan Carrigan, CEO and Founder of MoveBuddha, recommends that small businesses start with short-term or activity-based budgeting before looking too far into the future. The process of tracking every cost-related activity can help you plan your future budget in whatever increment you choose.

“It can be beneficial to analyze all costs and profits in the beginning,” Carrigan said. “Then create a monthly budget until you grow enough to create a sustainable budget that can last a quarter, six months, and eventually annually.”

Choose your vendors wisely

Michael Sawyer, Operations Director at Ultimate Kilimanjaro, noted that small businesses should take great care when choosing which vendors to partner with.

“Just because you have an opportunity doesn’t mean you should jump on it,” Sawyer said. “You don’t want to invest and waste money on a poor partnership.”

Before signing any contracts, Sawyer recommends taking the extra time to determine the quality and values of any prospective vendors to ensure they align with yours to make a positive impact on your business.

Once you’ve found the right vendor, don’t be afraid to negotiate for better pricing or terms. Look for opportunities to bundle services, request volume discounts, or secure lower rates through longer-term contracts. Clear communication, competitive research, and an understanding of your deal-breakers can help ensure you’re getting the best value without stretching your budget.

[Read more: 5 Cost-Cutting Tools For Small Businesses]

Be flexible

Rigid budgets that account for every dollar and cent aren’t necessarily the best strategically, according to Jan Brandrup, CEO of Neurogan.

“Choosing a flexible budgeting strategy has been most beneficial for us, and it is helpful because it’s adaptable and allows you to track the ups and downs of spending and revenue,” Brandrup said.

Although it’s great to have a budget that is planned on a monthly basis, flexibility can help manage any unexpected expenses that pop up.

“Having a flexible budget that forecasts as opposed to structures your money will ultimately promote and drive profit,” said Brandrup.

Tools and software to streamline small business budgeting

Learning how to create and manage a budget can be easier with the right tools. Here are a few software options to get you started.

Budgeto

Budgeto is a cloud-based budgeting and forecasting software platform designed specifically for small businesses. It aims to simplify financial planning and provide actionable insights, making it a good fit for small business owners who may not have extensive financial expertise.

In addition to forecasting capabilities, Budgeto's advanced features allow users to track key performance indicators (KPIs) and facilitate “what-if” scenario planning. This helps business owners make informed decisions about pricing, hiring, and more.

FreshBooks

FreshBooks’ cloud-based software boasts an intuitive interface that can help small business owners better manage and understand their finances in a single view. You can review your budget, conduct forecasting, categorize expenses, and more. FreshBooks even allows users to download and categorize bank statements for easier reporting.

Beyond core budgeting tools, FreshBooks boasts an app store for further integrations and offers dedicated customer support, which can be invaluable when it comes to financial management.

Jirav

Jirav is a financial planning and analysis platform that’s particularly useful for businesses experiencing rapid growth or those requiring more sophisticated forecasting than what basic budgeting tools offer.

Jirav's key features for small business budgeting include forecasting capabilities, allowing users to create detailed financial models and explore various scenarios.

The tool integrates with popular accounting and customer relationship management (CRM) systems, automating the import of data and reducing manual effort and potential errors. Jirav also offers customizable dashboards and reporting tools, providing an overview of key metrics and facilitating data-driven decision-making.

[Read more: Accounting Basics Every New Business Owner Should Learn]

LivePlan

LivePlan is business planning software that guides users through creating a comprehensive business plan, including detailed financial forecasts. It's geared toward entrepreneurs and small business owners, particularly those seeking funding or needing a structured approach to planning and financial management.

LivePlan's budgeting tools are integrated within the business plan creation process. Users can develop financial projections, track progress against those projections, and create visual dashboards to monitor key metrics. The software also provides access to expert advice and resources, which can be particularly helpful for those new to financial planning.

QuickBooks

QuickBooks is designed to help business owners handle banking, payments, payroll, and bookkeeping in one convenient place. With integration capabilities, you can understand the full scope of your finances by linking to your bank account, credit cards, and other apps. QuickBooks even offers online training and helpful tutorials to educate you on the software.

In addition to core accounting features, the platform provides extensive reporting capabilities, giving businesses valuable insights into their financial performance. QuickBooks has also incorporated AI-powered money management tools to help automate tasks and further optimize financial decisions.

Scoro

For businesses wanting an all-in-one system, Scoro offers budgeting features combined with CRM and project management tools. Users can take advantage of budget planning, forecasting, invoicing, financial reporting, and data analysis. The software even has a financial KPI dashboard so you can see how your business is doing based on your strategic goals and make cuts to your budget where needed.

Beyond budgeting, Scoro streamlines operations with features like workflow automation and project estimating, enabling businesses to manage projects and finances in one integrated platform.

[Read more: 8 AI Tools to Improve Financial Planning for Your Business]

How to budget during periods of economic uncertainty

During periods of economic uncertainty, it becomes more essential than ever to have a budget that adapts to your specific needs.

“When the economy is unpredictable or your income is up and down, a regular yearly budget will not cut it,” said Dennis. “Instead, use a rolling 90-day plan that you update regularly. The more flexible you are, the better you will do when others are stuck.”

To build a flexible budget, there are a few steps you can take, including:

• Understand your business’s core financials. By first gaining thorough knowledge of your company’s fixed costs, variable expenses, and cash flow projections, you can determine what business to expect and what revenue you need to bring in to support future operations.
• Set clear goals and priorities. Determining what costs are “must-haves” or “nice-to-haves” in times of uncertainty can quickly inform business priorities. Dennis advises cutting any unnecessary spending while continuing to invest in the things that bring in customers and encourage ongoing loyalty. Contingency planning can also help provide a set of guidelines in case of supply chain issues or fluctuations in revenue.
• Establish contingency plans. In the event of supply chain issues or fluctuations in revenue, contingency planning can ensure your business continues to operate smoothly. These may include guidelines and “plan Bs” or even diversified income streams; Dennis recommends building multiple sources of revenue and testing how each one performs under pressure.
• Forecast and update your budget. Create realistic forecasts based on current industry, market, and business trends, and update your budget accordingly. This can further prepare your business for success in spite of economic uncertainty.

Budgeting for growth: How to best allocate resources for scaling

Once your small business has been successfully balancing operations and saving revenue, it might be time to consider scaling. To do so, it’s critical to wisely allocate (or reallocate) resources to support the continued growth of your company.

Dennis offered one specific budgeting recommendation: the 70-20-10 rule.

“That means 70% of your income goes to daily operations, 20% percent to new opportunities, and 10% to long-term growth,” she explained. “Set up automatic transfers to your savings, so you stay consistent.”

Other strategies to develop a budget for scaling include:

• Planning before spending: Before making any “gut-instinct” decisions, review your fixed, variable, and unexpected costs. For both your current business and your expanded operations, you’ll need the revenue and return on investments to justify past and future expenses.
• Choosing the right source of funding: Determine if you want to pull from savings, reinvest profits, take out a small business loan, collaborate with investors, or apply for grants and other sources of funding.
• Anticipating future needs and pitfalls: Projecting your growth into best-, worst-, and moderate-growth scenarios can help you plan and prepare for any outcome that might arise after expanding your business.

“At the end of the day, a budget isn’t just a spreadsheet; it’s a road map that tells the story of your business’s priorities,” said Miller. “Revisit it often, stay flexible, and make sure it reflects both where you are and where you want to go.”

Emily Heaslip and Kaytlyn Smith contributed to this article. Some source interviews were conducted for a previous version of this article.

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.